Goldman Sachs Lift Recession Odds

Goldman Sachs note that “the Fed has front-loaded rate hikes more aggressively, terminal rate expectations have risen, and financial conditions have tightened further and now imply a substantially larger drag on growth - somewhat more than we think is necessary. We are downgrading our GDP forecast to reflect this additional drag. We continue to expect 2.8% growth in Q222, but have downgraded Q322-Q123 to 1.75%/0.75%/1.00%, which implies Q4/Q422 growth of just 0.9% (vs. 1.3% previously) and Q4/Q423 growth of 1.4% (vs. 1.6%). Following these changes, our real GDP growth forecasts are now even further below current consensus estimates for the next two years. We now see recession risk as higher and more front-loaded. The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply. We now see a 30% probability of entering a recession over the next year (vs. 15% previously) and a 25% conditional probability of entering a recession in the second year if we avoid one in the first year, implying a 48% cumulative probability at a two-year horizon (vs. 35% previously).”

• “Why not even higher? The war and further commodity price shocks have admittedly made the echoes of the 1960s and 1970s ring louder. But we are skeptical that hot wage growth and high inflation expectations are as entrenched today as back then. What might a recession look like? With no major imbalances to unwind, a recession caused by moderate overtightening would most likely be shallow, though even shallower recessions have seen the unemployment rate rise by about 2.5pp on average. One additional concern this time is that the fiscal and monetary policy response might be more limited than usual.”